by Dave Kutcher
Trying to figure out how much money you can withdraw each year from your retirement plan investments is a difficult task. There are so many external factors that impact this decision, it is hard for folks to know what is reasonable in terms of expectations.
In 1994 a gentleman named William Bengen developed what has been coined “The 4% rule” and it has been used widely with great acceptance in the financial planning/retirement planning business. The 4 % rule and the underlying work that resulted in the 4% rule gives us a guide into how much we can take from our retirement plans, depending upon how they are invested, without substantial risk of running out of money.
The new rule today is closer to 3%, by the way, but going back to the general rule for a minute, Bengen’s work would result in a 4% distribution rate in a portfolio balanced with 50% bonds and 50% equities and have a 75%-80% probability of success. As someone adjusts their portfolio mix of bonds and equities along with their desired distribution rate, the probability of success adjusts accordingly.
Let’s look at an example. Jane has $1,000,000 in her retirement portfolio. If we were to apply the 4% rule to Jane’s plan, she would receive $40,000 per year in income from a balanced portfolio and have a 75%-80% chance of her money lasting 30 years. If Jane were paying a 1.5% in advisory and investment fees in her portfolio, there would be $15,000 of fees that would impact that $40,000 withdrawal. Adjusting for the fees, Jane would need to take 5.5% to net a distribution of 4%.
In this case, $55,000 would be removed from the portfolio; 1.5% to fees and 4% to Jane. If we go back to the same chart that showed us that a 4% distribution would have a 75%-80% probability of lasting 30 years, at 5.5% including the advisory/investment fees, Jane’s new probability of success has decreased to approximately 30%.
Right here is a good point to ask yourself a quick question; would you board a plane for which you purchased a ticket if upon boarding the pilot explained there was about a 30% chance of you making it to your destination? We think not.
So, where do you go from here? You saved earnestly for years to accumulate the money you have available for retirement. You likely cannot live on 3%-4% as a distribution rate from your plans. You certainly understand that trying to account for investment /advisory fees on top of your income needs is going to be a challenge.
Here is what we can tell you in general; if you put everything you have in fixed interest no risk investments such as Certificates of Deposit, Money Markets, Fixed Annuities, the return on your money will not keep pace with the distribution rate you need to survive today, never mind 30 years from now.
If you put everything in more volatile markets such as the stock market and try to increase your distribution rate relying on potentially higher rates of return you significantly lower your chances of success because you will be distributing money in some periods during negative market performance and making it very difficult for your retirement monies to recover.
We have plans that can eliminate downside risk (no negative market performance) while still providing market like returns on your money. In doing so, you can manage the probability of success of not outliving your money while still reaping higher distribution rates each year than you would have been otherwise able to take. The key is three-fold; no fee programs, potential for market-based returns on the upside and a zero % floor…meaning you cannot lose money based upon poor market performance.
Nobody else is talking about these opportunities up here in Alaska. We think it is important for people to understand their options. With variables such as inflation and taxes having such a big impact on spendable income at a time in your life when you are supposed to be enjoying the great outdoors and life in America’s last frontier, we hope folks take the time to come see us.
I am Dave Kutcher, a retired Marine Corp captain and founder and owner of Kutcher Financial Services in Eagle River. We are on the radio every Saturday morning, “Retirement in the Last Frontier”, 8:30-9:30 on AM 650, Keni Radio.
